Protecting and encouraging whistleblowers has been a priority for the U.S. Securities and Exchange Commission (“SEC”) and its enforcement division. The SEC recently announced enforcement actions against two companies for their use of restrictive language in severance agreements that required departing employees to waive their rights to any monetary recovery under Rule 21F-17 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rule, promulgated under the Dodd-Frank Act, is part of the SEC’s whistleblower program and is intended to prohibit employers from interfering with an employee’s right to report potential securities law violations to the SEC.

Rule 21F-17 provides, in part, that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.” The SEC’s first enforcement action, taken on April 1, 2015, was followed by a string of investigations to review confidentiality, severance, release and other similar agreements of public companies and identify potential violations of this rule.

On August 10, 2016, the SEC announced that BlueLinx Holdings Inc. settled charges that it violated Rule 21F-17 by requiring departing employees to sign severance, release and similar agreements that restricted their ability to communicate certain securities law violations to the SEC and waived their right to collect any whistleblower awards should they report any such conduct. More specifically, the order alleged that the agreements contributed to this violation by including provisions in the severance agreements that prohibited employees from disclosing confidential information unless compelled to do so by law, and even then, employees were then required to notify (and obtain consent in some cases) from the company before disclosing any confidential information. Furthermore, the severance agreements did not include an exception for any voluntary disclosures to the SEC, which as the SEC found, “forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.” As part of the enforcement action, BlueLinx agreed to pay a $265,000 civil penalty, amend its severance agreements, and notify past employees who signed such agreements that they were not prohibited from providing information to the SEC.

On August 16, 2016, the SEC announced that Health Net, Inc. settled charges that it violated Rule 21F-17 when it similarly required departing employees to sign severance agreements that waived their right to a whistleblower award. Although the severance agreements did not restrict the former employee from filing charges or participating in any investigation, the former employee waived any right to an individual monetary recovery based on a communication by the employee to any governmental body or department. The SEC found that these restrictions “undermined the purpose of the whistleblower provisions” and its goal of encouraging individuals to report to the SEC. As part of the enforcement action, Health Net agreed to pay a $340,000 civil penalty and notify former employees who signed such agreements that they were not prohibited from seeking or obtaining a whistleblower award.

These recent enforcement actions and other ongoing investigations underscore the SEC’s aggressive approach to interpreting and enforcing Rule 21F-17. Companies, both public and private, should review any confidentiality provisions, such as those contained in severance, employment, confidentiality or release agreements, and consider whether they contain restrictions that could be viewed as having a chilling effect on potential whistleblowers’ ability to report to the SEC. Companies must balance the need to protect sensitive information with the requirement that they not impede whistleblowers. Where appropriate, companies should amend those agreements or handbooks to remove any such impediments.

KMK Legal Alerts and Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.